Unsponsored and Unfiltered Mutterings on Education, Politics, and Business from Someone Who Still Hasn't Learned to Keep His Big Mouth Shut

Wednesday, July 25, 2012

Drought May Drive US Recovery

There are many reasons why the US economic recovery has been slow and jobless; chief among these is the persistent risk of contagion from the Euro zone and the rapid slowdown in China, which is hardly the "soft landing" that China's policymakers assumed they could deliver.

The bond markets have had their day (okay, their year) but now we see record low yields among almost all bonds worth holding, with the remainder being so risky that most investors won't even consider them. The result is record yield spread between the larger Euro-zone countries that are most essential to recovery. For example, as of this writing, there is a ~5% spread between Germany and Italy in the 10 year bond market, and a 6% spread between Germany and Spain. This presents bond investors with two equally unattractive investment options: you can invest in Germany's debt and get no return, or invest in italian or spanish debt and pray that they aren't soon declared junk. There's almost nothing in between to lure investors, no mid-risk lure. Hence Europe's debt cycle is broken and there is a flight to safety in the US bond market... thanks, but no thanks! In the US, 10 years are now almost as low in yield as Germany's.

[One positive is that US 30 year bonds are creating great mortgage opportunities, but many Americans are reluctant to make a commitment while so many job risks loom. Also, mortgage underwriters -once bitten, twice shy- are now looking for ~20% down, which many Americans just cannot muster.]

With the bond markets unattractive and equities relatively flat (unless you have the time and interest to trade on short term swings), it appears that commodities -excluding oil- are primed for great performance through the rest of the year. I exclude oil because of the glut, which arose from oversupply and poor global demand. The oil glut has of course taken its toll on alternative energy concerns, particularly solar. If you like solar, then buy panels, not stock!

The commodities I am targeting are those that have a well established supply and demand relationship, and which have decreasing supply, i.e. there is no risk of the glut that we see in oil. Among these, my most attractive performers have been basic agricultural products- corn, wheat, soy. I have been accessing these via various ETFs and ETNs. $CORN has been my best performer over the past 6 weeks or so; the first whiff of drought had me intrigued and it now appears that the worst (or best!) is yet to come. My main concern is the very low volume in $CORN trading, which suggests very high short term volatility. Thus far I have profited on the downswings and the upswings, but there is risk that I will snooze and lose at some point. A safer investment may be $MON, as pointed out by Tim Collins and repeated by Jim Cramer. $MON is exhibiting a really beautiful ~3 year inverse head-and-shoulders pattern that suggests a 50% upswing by the end of the year. Worst case seems to suggest a solid 5-10% upswing. And there are the dividends...

In addition to $CORN and $MON, I am working with $FUE, $HAP, $DBA, and several others, while exploring the secondary and tertiary effects of the drought- food prices etc.

Now, on the topic of recovery and what may get it started in earnest. What will drive further investment into the market this summer? Investors need solid mid-risk opportunities, and ironically, the drought may be just the thing to deliver that. With the risk of oversupply virtually nil, agriculture may bring some investment back onto the table. At the least, we might finally be seeing some re-flation by the end of summer. Consumers will lament the higher price of their Wheaties, but this is precisely what the US market needs... some initial sign of inflation, however tentative it may be. That will suggest, to many investors, that real inflation is just around the corner, which will of course drive a lot of investment back into equities and gold. QE3 would of course only heighten that effect. So... in a roundabout way, the investment picture is looking a little bit better because of the drought.

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Brief Bio

I have many interests and a diverse background. I was born in the US and grew up in the middle east (Jordan) and southern Africa (Rhodesia / Zimbabwe and Botswana). I completed middle school via correspondence with The Calvert School in Baltimore, and then returned to the US for high school. I earned my PhD in physics at Penn State in 2001. Thereafter I did my postdoc in the Netherlands, before establishing a nanophysics lab and introducing several new courses at the University of Virginia. Next, I became a Program Manager for a research division of SAIC based at the Naval Research Laboratory (NRL) in Washington DC, while on leave from UVA, and then returned to teach for one year with the physics department at UVa. I am now a visiting professor in the Department of Electrical and Computer Engineering, while continuing my work managing several research contracts at NRL and considering what's next. I aim to help young people get the kind of experiential education that connects them to good opportunities- that's my core motivation.